What to do with Peerless Manufacturing? Is China a Buy?

27

I recently wrote an article on whether or not you should be thinking of leaving Peerless Manufacturing in the dust which can be found here.

I also wanted to further expound on the idea that I feel Chinese companies are near or at the equivalent of March 2009 lows in comparison to US stocks. I don't think you can throw a dart and be correct, but I largely expect a greater than 50% chance that if you do your homework and pick out a few Chinese names they will vastly outperform the S&P 500 over the next 2-3 years. With that being said, a few days ago I set up a tracking portfolio, much like UltraCrap, UltraOlympus and UltraRetirement are. It will not be actively traded (other than to possibly add another name). It is comprised of roughly 180 companies that are either based in China or operate a very significant portion of their business in China. My theory is that in 2-3 years this portfolio will be showing something around 65-67% accuracy with approximately 4000-5000 points if not more. This portfolio will serve to see whether I was right about Chinese stocks or whether you can all point and laugh at me in the end.

I have named the new tracking portfolio UltraChinaand it will serve to track my "Chinese credibility" over the next 2-3 years. I think you'll see some losers in here, but I largely expect the winners will dwarf the select few duds. Please keep in mind these 180 picks are all Chinese companies and didn't go through my usual screening process (i.e. I don't care what they do or if they make money.. they just needed to be based in China or do a large amount of their business in China).

I don't think my timing is that much better. One odd intricacy lately with Chinese stocks is they vastly underperform in extremely bullish markets. If the S&P is up over 1.3% in a given day, chances are very likely you're losing or underperforming with your money. I'm betting on a relatively flat to ever so slightly down market in the next 2 years so I think these Chinese names make sense.

I appreciate your effort because I am also a China bull. But I would appreciate if if you would use your large, insightful yet overly sarcastic brain to analyze the following question. If the Chinese currency appreciates significantly, will this be good for all Chinese stocks - or will Chinese exporters actually go down in value due to possible profitability/market share loss caused by reduced competitiveness?

One odd intricacy lately with Chinese stocks is they vastly underperform in extremely bullish markets.

Yeah, no kidding.

My own opinion is up short term and extremely down long term

I'd love to hear an elaboration of this, perhaps in its own blog post. Its so widely accepted now that China will be #1 in regards to GDP within a few decades, to hear the contrarian side would be beneficial for everyone.

Zero normal research went into making these picks, thus the disclaimer above. All I did was confirm they were based in China or did significant business in China, so there are some serious stinker stocks in there too. I've listed a few of my favorite on past blogs, so that's what you need to go by.

As for Netsol, let it run baby run! That company is worth $2.50-$3.50!

Chinese stocks are undervalued, but they have been for a while. What's going to make that scenario change? People aren't going to start trusting Chinese companies overnight, and I'm pretty sure they won't over the long haul either. The market is just as much about psychology as value and who cares what the P/E is if the E is impossible to trust.

If the Chinese currency appreciates significantly, will this be good for all Chinese stocks - or will Chinese exporters actually go down in value due to possible profitability/market share loss caused by reduced competitiveness?

I think this link has some pretty good arguments for what might happen. The author believes that Chinese consumers will benefit and exporters will suffer (and likewise with consumer and exporter stocks). Give it a read if you have some time.